This example, by Matt Levine, is a funny way to understand how many negotiations work:

In negotiations, it is often helpful to have someone else, some “absent principal,” to blame for your position. You go to a car dealership, the salesperson says “this car costs $25,000,” you say “I want to pay $21,000,” she says “I like you, I want you in this car, but my boss won’t let me go lower than $24,000,” you say “$22,000,” she says “I really want this to work out, let me check with my boss,” she goes into the break room and watches TikToks on her phone for five minutes, she comes back and says “my boss is really mad at me but I talked him down to $23,500.”

The boss is a crutch, an excuse. The salesperson is adversarial to you — she wants to charge more, you want to pay less — but wants you to feel like she’s on your side, so you trust her and agree to her proposals.

Now, Matt ultimately goes on to talk about how in some situations, such as in the financial industry, this could be considered criminal behavior. But that’s a more nuanced topic for his column, and not for this blog. Here, we’re just going to use it as a lead-in to say that negotiating is kind of important for real estate.

In fact, when I was in grad school, my mentors used to always say to me, “everyone should take a negotiating class.” And so I went and did that. It was a lot of fun. I remember us being given “positions”, and then we’d have to go out and see what we could negotiate.

One particular concept that I often find myself coming back to is something referred to as the “ZOPA.” The Russians in my class were quick to point out that this sounds like the word ass in their language, but in the world of negotiating it stands for “Zone of Possible Agreement.”

What it describes is whether there’s an overlap between what both parties are willing to accept. For example, if a buyer is willing to pay as much as $100 for a particular piece of real estate, and the seller is willing to go as low as $80, then there is a positive ZOPA of $20.

This means that a deal should theoretically happen. However, interestingly enough, I discovered in my classroom simulations that negotiations can still arrive at an impasse, even with a positive ZOPA. Some people want to do deals, and some people like to extract everything they can from a negotiation.

Of course, if you have a negative ZOPA (i.e. no overlap in what the parties are willing to accept), then it’s obviously pretty hard, if not largely impossible, to come to a deal. And since 2022, you could say that the real estate industry has been characterized by a greater number of negative ZOPA scenarios.

But if my predictions for this year are correct, then 2024 will be the year where we start to see some more positive ones.